Ronald Reagan once succinctly summarized the US government’s view on regulation the following way: “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it”. Taking the UK as an example, financial technology was worth $24.5 billion in the first part of 2021, according to Statista - safe to say, the sector is on a roll. On top of the direct economic effect, one has to consider fintech’s wider broader economic impact from lowering the lower cost of credit or insurance, improving the level of financial inclusion and reducing financial transaction costs across remittances, payments and investments.
Of course any industry is prone to missteps along the way. The few examples for fintech globally include the proliferation of Ponzi schemes in China together with the growth of P2P lending, the use of bitcoin for illegal purchases and investor misleading at Lending Club that brought the demise of the company’s founder. Nonetheless, since the industrial benefits are beyond reproach, the ball is in the regulator’s corner to curb the excesses, streamline the judicial framework and establish the rules of the road for the multi-faceted and rapidly ascending Fintech industry.
There is clear recognition worldwide that regulation is needed to ensure long-term and sustainable growth. At the end of 2016, the Office of Comptroller of the Currency (OCC), a division of the U.S. Department of the Treasury, proposed to create a federal charter for non-deposit banking products and services – a major change for a country with state-by-state financial regulation which could lower barriers to entry for companies looking to innovate the financial services industry. While the Governor of the Bank of England Mark Carney has stressed the need to create holistic infrastructure to support the flourishing sector.
Having had first-hand experience in a regulated financial services industry from Brazil to EU and Central Asia, I believe there are a number of clear steps that can drive the growth of fintech globally.
1. Clear communication with the industry
Although it may appear obvious, it is critical for the regulator to engage with the fintech industry in gaining an optimal understanding of the needs of the industry. Obviously the industry is only one of the voices, but in the environment of rapid technological and economic change, it makes sense to get first-hand information. This may help the regulator to prioritize and focus on solving strategic issues.
2. Share regulatory functions
As much as is possible, regulatory functions have to be shared. The fintech umbrella covers multiple industries: consumer and corporate lending, insurance, payments to name a few. In our experience it makes sense to functionally compartmentalize the regulation. For instance, the central bank or consumer protection bureau division regulating consumer lending by the banks should be regulating the similar area of fintech activity. This makes sense from the perspective of synchronized standards for consumer protection. It’s in everyone’s interests to have a unified set of standards on anti-money laundering (AML) and know-your-client (KYC) information disclosure as well as collection practices. Furthermore, incorporating fintech regulation together with mainstream financial services firmly places the former into the center of regulatory attention.
3. Focus on creation of new infrastructure
Any government should be actively seeding, sponsoring and promoting what Mark Carney calls “hard infrastructure” for the new breed of financial services companies. This type of infrastructure is more often too much of a burden even for shared corporate investment, yet its potential benefits are clear for any country. The area of focus should be within payments, settlement, identification and data access. One of the best global examples of the sovereign strategic thinking on the subject is undoubtedly Aadhaar in India – a biometric ID system with over one billion enrollees or most of the country’s adult population. This gargantuan project coupled together with the country’s recent clamp down on hard cash in the economy can really change the lives of hundreds of millions of its citizens by actively encouraging financial inclusion.
4. Share the use of existing infrastructure
While creation of the infrastructure is clearly needed, there is lower hanging fruit for driving industrial competitiveness available to regulators globally. First and foremost it is key to empower the citizens to take ownership of their data held by large incumbents including mainstream financial services (banks, insurance companies) and telecom companies. The way to do this is through the mandatory sharing of this information to third parties, obviously with the explicit consent of the ultimate data owner. While on the one hand it enables the latter to monetize the data and get access to more competitive offerings, this also enables the fintech firms to focus on what they do best: deploy cutting edge technologies and data analysis in targeting market inefficiencies. The prime example of data sharing is the PSD2 directive in the EU that is forcing banks to open up the trove of transactional data to third-parties via API. This initiative is clearly laudable and should be mirrored by regulators globally.
5. Introduce 5-year road maps
Regulatory uncertainty acts as a major overhang, preventing the industry from developing. First and foremost this uncertainty stops the flow of capital into the industry creating a massive earning multiple compression. This further prevents the reinvestment of capital due to the increase in uncertainty. It’s important to emphasize that in the fintech world global players with technological know-how have optionality over geographical expansion. All else being equal, these companies will always invest in the countries with the most transparent rules of the road. This implies that the countries that take an ambivalent position are in a precarious position of losing out.
The future of the fintech industry will not be shaped by market adoption and technological advances alone. The role of the government in fostering fintech and steering it in the direction of sustainable growth is key.
Alexander Dunaev is COO at ID Finance. Alexander leads technology, R&D, product development, scoring models engineering and data science. He also oversees business development and the overall strategy for the business in partnership with his CEO. Alexander has over 9 years experience in banking and finance, having previously worked at Deutsche Bank. He graduated from Imperial College London with a Masters degree in Finance.